Net Neutrality: Prelude to Structural Separation?

One of the many reasons that those of who us cherish free markets and limited government oppose net neutrality regulation is because we believe it will be a major step down the slippery slope to far more comprehensive regulation of the Internet. Once we let this regulatory genie out of the bottle and the bureaucrats get their tentacles around the Net, a host of other misguided restrictions on Internet activities will likely follow.

One of the more destructive of these potential outcomes would be full-blown structural separation of broadband networks, such that government would force network owners to spin off their retail arms and become pure wholesalers of access (on government-set terms and price-controlled rates, of course). In a nutshell, this is the old regulatory playbook that did very little to benefit consumers or competition. Amazingly, however, we already have someone suggesting it as the logical next step after we get done slapping net neutrality mandates on the Internet. Writing in the Boston Globe on Saturday, David Weinberger a fellow at the Harvard Berkman Center, says we need to take the next step and think about busting up broadband networks into atomistic bits:

“An Internet delivered by a tiny handful of old-technology providers, even if constrained by Net neutrality, doesn't get us to the second vision. It doesn't give us access laid like a blanket over the entire country, rich and poor alike. It doesn't give us a Net that we make together, rather than a Net the contents of which we consume. For that, we need more than Net neutrality. We need a structural change. We gave the incumbent providers their chance. They have failed. The FCC could decide to once again require them to act as wholesalers to local Internet Service Providers, which would offer genuine competition on price, access, reliability, services, and whatever other differentiators an open market would devise.”

Back in 2002, Wayne Crews and I penned a paper for Cato entitled, “The Digital Dirty Dozen: The Most Destructive High-Tech Legislative Measures of the 107th Congress,” and we named a structural separation proposal floating through Congress at that time as the single most destructive measure of the year. What we said then of structural separation for older wireline telecom networks is every bit as true today regarding proposals to impose structural separation on broadband networks--perhaps even more so since we would be talking about structural separation for telco, cable and wireless networks. As Wayne and I argued back in '02:

Policymakers should think twice about the logic of another divestiture for telecom, however, and bear a few things in mind when faced with such proposals. First, structural separation is hardly simple regulatory surgery. It is more like amputation, and, in this case, the proposed surgery is for a patient who doesn’t need any appendages removed in the first place. The American telecommunications system is far more complicated than many policymakers appreciate. Forcing the Bells to split their system in two would be a very messy and drawn-out process, taking years to complete and accomplishing nothing more than a steady flow of work for the armies of lawyers, engineers, economists, and consultants that would be brought in to iron out the ugly details.

Second, forced divestiture is not likely to spur any real competition or investment. Although splitting the Bells in two might make it a little easier for regulators to encourage the same sort of freeloading by rivals that the Telecom Act’s open access provisions have fostered, that isn’t the genuine competition consumers are looking for. America needs competition in network creation, not just more companies using the same old copper lines to deliver plain vanilla telecom services.

Third, divestiture proponents conveniently ignore another troubling issue associated with splitting the Bell networks into wholesale and retail components: Who will maintain and upgrade the last mile to our homes and businesses after divestiture? Turning the local loop into the equivalent of just another lackluster public utility service not only stamps out investment incentives but also leaves unanswered some troubling questions about future network management.

Finally, breaking up the nation’s communications grid would have profound ramifications for the economy as a whole. The harm that would come to the Bells and their millions of employees and shareholders is obvious. But consider the impact on communications equipment providers, computer companies, broadband application and content providers, and the many other sectors and businesses that depend upon a stable communications industry.

Again, all this would be even more true today for America's modern broadband marketplace. However, Mr. Weinberger and many of his fellow net neutralitistas would have us believe that America's broadband needs would be better satisfied by forcibly returning the Internet access business to a sleepy little cottage industry run out of people's garages circa 1994. Hey, I don't know about the rest of you, but I remember those days AND THEY SUCKED. Anyone who likes to wax nostalgic about the days of 14.4 modems, dial-up access, and CompuServe e-mails that looked like Soviet phone numbers, is penning revisionist history. We have made amazing strides since that time and although we a ways to go before every neighborhood has the sort of blazing fast fiber that's been rolled down my block, we aren't going to get serious facilities-based innovation and that sort of sophisticated network construction and deployment if the FCC is empowered to smash broadband networks into smithereens.

It's the same folly that has animated so many previous central planning fiascos; let the political elite reorgazine the economy according to some grand vision of the way markets should work in some ivory tower vacuum. It's an economic disaster of spectacular proportions in the making, and mandating net neutrality could be the first step down that path.